1. This is an appeal by the plaintiff from the judgment and decree of the learned Civil Judge I, Indore dismissing no suit for the refund of an advance payment made to the defendant in course of a transaction following an oral agreement to buy a quantity of stone chips for building purposes, A small quantity has been delivered and accepted, the priceof which the plaintiff had deducted from his claim, me rest of the agreed quantity was rejected by the plaintiff for reasons which the defendant considered unsatisfactory; Accordingly, the plaintiff demanded the refund, which being refused, he brought the suit, the Court found that the plaintiff was guilty of the breach; and at the same time that the amount given to the defendant was not earnest money properly so called guaranteeing performance of the contract, out only part of the price paid in advance, sun a decided that he was not entitled to a refund, and accordingly dismissed the suit.
2. The questions that arose, are, ore the facts firstly, which of the parties was guilty of the breach; secondly, whether the total amount paid was Rs. 5400/- as averred by the plaintiff or only Rs. 5000/- as admitted by we defendant; and thirdly, whether this was earnest money properly so called liable to forfeiture or mere proof of breach of contract by the purchaser without any pleading or proof of actual damage, or whether it was only payment by way of part price in advance, the crucial issue on law is, whether the latter type of payment is liable to forfeiture by the other side on mere proof of breach of contract, mere were some formal issues with which we are not concerned now.
3. The plaintiff's case was that some time in February 1950, he had agreed to purchase from the defendant fifty thousand cubic feet of stone chips of a specified size at Rs. 29-8-0 per hundred cubic feet. The agreement was oral but the plaintiff alleged that the defendant had accepted the condition that the chips supplied should be such as would meet his approval. Actually, the plaintiff in his own turn was to supply them to certain contractors building a new hospital at Indore. The material was to come from a quarry called 'Cadh Tekri a short distance from the town, the plaintiff averred that he had made three deposits with defendant, the first Rs. 2000/- on 25-2-1950 about seven or ten days after an agreement to purchase the material, me second of Rs. 3000/- on 2-3-1950, the first in cash and the second by cheque; and the third in cash of Rs. 400/-on the defendant's demand, also on 2-3-1950. In June or early in July, the plaintiff got delivery of five truck loans of chips which he made over to the builders. The latter, however, complained about the quality and the plaintiff himself found that it was interior to the one the determine had agreed to give. Accordingly, the plaintiff decided not to buy any more of stone chips. On a notice by the defendant, dated, 17-7-1950 calling upon the plaintiff to take delivery of the rest of the agreed quantity of chips, the latter replied setting out his objection to the quality that was being actually delivered and demanding better quality of material. As the defendant was not prepared to agree, the contract was not performed except for the five truck-loads priced at Rs. 203/-. The plaintiff accordingly demanded the refund and on refusal sued for Rs. 5400/- plus interest minus the price of the five truck loads of the material.
4. The defendant for his part admitted the receipt of the two sums of Rs. 2000/- and Rs. 3000/- respectively on the dates mentioned, but not the sum of Rs. 400/- on 2-3 1950. He also admitted that the contract was oral and was concluded some time about the middle of February 1950. He charged the plaintiff with wilful breach and denied the allegation that he was delivering inferior stuff. Actually, the defendant had heard that the Builders, who were to buy from the plaintiff, has found some cheaper material and were not prepared to buy any more of the chips from we plaintiff.
5. One, difficulty in this case was that the agreement made in the middle of February was not reduced to writingand had to be pieced out from the entries in the books on the parties, reference in their correspondence and, of course, the general sequence of events and the circumstancs, the Court found:
'It is clear that the manner in which the money was paid in two instalment and in which it has been recorders in Ext. P/2, it was not the earnest money properly so called lkjs ds :ie but only advance payment on the Bargain. Since the plaintiff is guilty of the breach on contract and the defendant was willing to supply the materials while the plaintiff was unwilling to accept it, he is not entitled to recover the amount paid under this heading.
6. In this appeal, the plaintiff has reiterated his position that the breach was really committed by the defendant but apart from it, this stand is that even on the assumption that the plaintiff is guilty of the breach, still he is entitled to a refund because the amounts were paid not as earnest money properly so called but an advance price winch is not automatically liable to forfeiture even on breach of contract by the depositor, the defendant-respondent, besides supporting the findings of the Civil Judge in regard to the breach of contract, has suggested that the amount was paid really as earnest money lkjs ds isBs and has sought to support the dismissal of we suit on this ground.
7. Ground No. 1: Responsibility for the breach -- In view of the finding we propose to record in regard to the nature of the deposit, whether it was by way of earnest money properly so called or only advance payment, it is unnecessary to enter into any lengthy discussion on this question, the learned Civil Judge's finding that the plaintiff was responsible for the breach, seems to be a reasonable one. His averments that the chips actually supplied in five trucks were below the agreed quality and unacceptable to the builders, have not been brought home, though the agreement between him and the builders, to whom he was to supply, was a written one so, it must have described the quality. Again, throughout the evidence, it was said that me builders who were to purchase the goods from the plaintiff were shown samples at the quarry and were also in a position to consider the quality of the five truck loads, strangely enough, none of them were examined. A mere general statement that the contract was that the goods should be acceptable to the plaintiff does not take one anywhere. Some objective standard should be established and the plaintiff has to show that a fair examination of the goes supplied would have led to the result that it was below that standard. We have therefore no proof of real justification on the pan of the plaintiff to refuse to take delivery of anything more than the five truck-loads. We would therefore, accept me finding that the breach was committed by the plaintiff, very probably because his purchasers declined to take any more, not because of any difficulty, but because they were getting cheaper material elsewhere.
8. Ground NO. 2 : -- But as the suit has been framed and defended, the mere fact of the plaintiff being guilty of the breach cannot justify the defendant forting the deposit, unless we find a contract with a stouten by way of penalty that the sum of Rs. 5000/- was earnest money liable to be forfeited in case of breach by the plaintiff without proof of actual damage. AS already noted, the position taken by the defendant was not that he had suffered actual damage or loss to which he was entitled to apply this deposit; it was that loss or no loss, actual damage or no actual damage, the deposit was by way of earnest money proper and once Were was breach by the plaintiff, he could straightway forfeit it me peculiar feature of the lower Court's decision, was that onthe one hand, it finds that the deposit was not earnest money properly so called, out only part price paid in advance, and on the other, he dismisses the suit on the assumption that actual damage or no actual damage, the party complaining of the breach i.e. the detendant is enteded to retain the deposit as the stipulated penalty, it therefore becomes necessary to find out trom the circumstances and the course of events, whether the deposits were the earnest money or advance payment of price, in the event or there being a written contract, this is a simple problem. But in the absence of it, one has to derive the terms front an the circumstances and the evidence. certain general principles have been laid down by the High courts to enable one to decide, to which Kind out of the two, any particular belongs.
9. Section 74 of the Contract Act, itself does not speak of the earnest money in terms but runs -
'When a contract has been broken, it a sum is namedin it as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way or penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive, from the party who hasbroken the contract, reasonable compensation not exceeding the amount so named, or as the case may be, the penalty stipulated for.'
Though, there seems to be some difference of view in thisregard, still the words underlined (here in ' ') seemed to be wide enough to include it. Apart from it, we have caselaw. In Chiranjit Singh v. Har Swarup, AIR 1926 P. C. 1, the nature of earnest money properly so caned is neatly defined:
'Earnest money is part of the purchase price when the transaction goes forward. It is forfeited when the transaction tails through, by reason of the default or failure or the vendee.'
The question was considered at some length in the ruling reported in Bhalchandra v. Mahadeo, AIR 1947 Nag 193, following the dictum of the Privy Council, this judgment rules that once it is earnest money, it can be fortified whether or not there in an express forfeiture clause or whether the words 'earnest money' are actually used or whether or not the proportion to the total consideration is large or small. In that case, there were unmistakable indications that the deposit concerned was earnest money or guarantee of performance and the question before theCourt was not so much whether or not it was this or that kind of deposit but whether, it being a deposit guaranteeing performance, certain consequences followed.
10. The ruling reported in Abdul Ganj and Co. v. Trustees of the port of Bombay, AIR 1952 Bom 310 is similar to the Nagpur ruling and gives further help in clearing some confusion in earlier rulings of that High Court. Whether the sale proposed is of land or immoveable property, the principle is the same. It a deposit is made as guarantee for the performance of the contract, a is liable to forfeiture, on failure to perform the contract, or its repudiation by a party.
'Indeed, it is this very purpose that the deposit fulfils. It is a guarantee for the performance of the contract, and it supplies a motive to the parties to fulfil their obligations under the contract. It acts 'in terrorem' and by reason of the fear that the deposit might be forfeited if the contract is not performed, the parties are induced to carry out their obligations under the contract.'
Both the Nagpur and the Bombay rulings proceed on the assumption that deposit guaranteeing performance of the contract does not come within the ambit of Section 73 or 74;but that is not the real point for our purpose, whether or not Section 74 literally includes the case of a deposit guaranteeing performance, its essence is such that failure or breach itself is liable to forfeiture without proof of actual damage.
11. In principle, there is no difficulty in regard to this proposition, but in practice the question arose from time to time, as to whether a particular deposit of money by the vendee is really one by way of guaranteeing performance, that is to say, earnest money properly so called, or one by way of part payment in advance of the purchase price. It can be the one or the other depending upon the terms of the contract to be derived either from the instrument, if any, or the circumstances. As held in Seedranna v. Yastkalappa, AIR 1926 Mad 117, the advance is liable to be forfeited only when it is given as security for performance of the contract but not otherwise. In that case, there was no definite written contract from which the intention of the parties could be ascertained and it was round that the defendant, who was resisting the claim to refund, was in need of ready money. Since there was no definite evidence to the effect that it was a security deposit properly so called forfeiture was not allowed. This distinction between a deposit which is forteitable on purchaser's default and a part payment which is returnable has been dealt with at some length in the English case reported in Dies v. British and International Mining and Finance Corporation Ltd. (1939 1 K. B. 724. In the Madras case reported in Rattamma v. Krishna Murthi, AIR 1928 Mad 325, it was pointed out that -
'Advances made by purchasers to vendors in respect of a sale are recoverable even if the transaction falls through owing to purchaser's default, unless the vendor proves that there is an implied contract between the parties that the money paid in advance should be treated as security for purchaser's fulfilment of the bargain and as such liable to be forfeited on his default',
The, same principle is reiterated in Krishna Chandra v. Khan Mamud Bepari, AIR 1936 Cat 51 :
'Whether a contract of sale is not completed, the purchaser paying certain sum in part-payment of the price andnot as earnest money is entitled to recover it with interestwhether the breach is on his part or on the part of theseller'.
The ruling in Madan Mohan v. Jawala Parshad, AIR 1950 t. P. 278 is to the same effect:
'Part of the purchase price cannot be forfeited because it is not a guarantee for the purpose of the contract which alone can be forfeited if the transaction falls through'.
It has been found necessary to set out the different viewsexpressed from time to time by our courts because in this caste, the words 'advance', 'deposit', 'security 'earnest money,' seem to have been loosely used and some additional contusion created by the use of Hindi synonyms without noting their exact English equivalent. Another difficulty already observed is the absence of any written instrument.
12. The crucial test is that a security payment or earnest money proper should be in accordance with the term of the contract to that effect. Whether it is written or oral, it should be ascertainable with reasonable precision that when the parties entered into the agreement, it was understood by both of them, that a specific amount must be paid by one of them to the other, as guarantee of is performance of the contract and therefore liable to be retained by the latter on a breach by the former. When me amount is paid at the time of the agreement itself, other things being the same, a condition of this nature is more probable than when the amount is paid some time afterwards. Similarly, when the amount is paid in lump, it is more probable that it is the earnest money guaranteeing performance. In the event of its being paid in two or mores instalments, the probability is in the other direction. Of course, even when the payments are made sometime after the agreement, and in more than one instalments, any condition already in the agreement, that within such and such date, such and such amount should be paid in one or more specified instalments, would obviously and to the probability of its being earnest money. In all cases, one has to take all the circumstances into account; this is particularly so in the absence of a written, instrument.
13. In the instant case, for example, the agreement which was oral was in the middle of February, let us say, by the 13th or 15th. It is common ground that on that date, no money was deposited by the purchaser with the vendor. Moreover, there is also no evidence clearly indicating that even on the 14th or 15th Feburary, it was agreed that before seeking to take delivery of the goods, the purchaser should, within such and such date, deposit with the vendor such and such amount. About ten days later, RS. 2000/-were paid on 23-2-1950. The 'rokad' entry in this regard is Ex. P/2 which is really signed by Mahanlal Garg --Rupees 2000/- paid to Monanlal Garg as advance inregard to bargain okcn lkSnk of 'gitti' from'Gadha Tekri' quarry. 'For one thing, there is noindication that this is in accordance with a condition inagreement of 14th or 15th and for another, this is only oneinstalment out of the amount that was to be deposited.
About eight days later, an amount of Rs. 3000/- is paid bycheque on 2-3-1960. The plaintiff says and his bookshows that Rs. 400/- were also paid in cash on that daybut the defendant denies it, and seeks support for his dematfrom the non-mention of the amount in the plaintiffs ownnotice, served some months later. The plaintiff assorts thatthis is only an inadvertent omission. Any way, for ourpurposes it is safer to ignore these Rs. 400/- and proceed on the assumption that Rs. 3000/- were alone paid on2-3-1950. But the point to note is that here again wepayment was 'as advance'. This is second instalmentand here again there is no indication as to whether two ormore instalments were to be paid and whether this instalment itself was in accordance with a condition in the agreement made in the middle of February. AS Decidedin different rulings, the actual word used by one or otherparty, say, 'advance' or 'security', or 'earnest money,is by itself far from being conclusive; put when there. isaltogether no indication that the money is paid in accordance with the condition in contract as security for performance, and it is paid not at the time of the contract itself not on a date already agreed in the contract, buton different later dates not originally envisaged, the inferenceis that it is an advance properly so called, that is to say,part-payment of the price and not earnest money.
14. There is one test, though it is not conclusive. When we are able to find that it is security properly so called, it is altogether immaterial what proportion it bears to the total consideration; if a party chooses to give Rs. 99/- as earnest money for the performance of a contract for purchase of goods of Rs. 100/- worm, me Court should not treat it as part-payment of price because It is such a large proportion. This is the principle laid down in AIR 1947 Nag 193 (supra). But when we are trying to find out whether the deposit is of this or that out of two kinds, the proportion it bears to the total consideration in the bargain is of some significance. The larger the proportion, the lesser the probability of its being earnest money properly so called. In the instant case, the totalpurchase money is about fifteen thousand rupees, and the deposit concerned is of one-third. There is no hard and fast rule and the practice seems to vary from business to business; but where the goods concerned are non-perishable, made locally, and subject to no great fluctuations in prices themselves, this proportion it quite large. Other things being the same, it shows that the payment was by way of advance purchase money and not earnest money. But this is only one of the several indications.
15. This incidentally is the finding of the learned Civil Judge. In this Court, the respondent has tried to support the decree by arguing for different finding of this issue of fact. But the foregoing discussion would show that five thousand rupees, deposit in two instalments by the plaintiff-purchaser with the defendant-vendor was price payment in advance and not earnest money.
16. Ground No. 3: -- The practical consequence;of this finding is clear. The plaintiff is entitled to recoverthis amount (that is, Rs. 5000/- Rupees five thousandfrom the defendant by way of refund after deduction of theprice of the five-trucks-loads of the chips, It is a money payment and the plaintiff is entitled to interest from the dateof the payment till the date of realisation at 6 per cent perannum. In the result, the plaintiff's appeal is allowedwith costs payable by the defendant to the plaintiff alongwith pleaders' fee according to rules.